Taku Fundira, tralac Researcher, asks whether the rise in protectionism is a repercussion of the global economic crisis

The world economy is facing significant challenges. The financial crisis and its impact in the real economy, highly volatile commodity prices, and the failure to conclude the Doha Development Agenda have all worsened the economic outlook. With tight government budgets, high unemployment, slower growth, and the fading prospects of further multilateral trade liberalisation, the threat of protectionist pressures looms even larger.

This discussion note aims to highlight how countries are increasingly reverting to protectionist policies as the repercussions of the global financial crisis continue to be felt 4 years after the outbreak of crisis. With the threats of a second global economic crisis high, the question to be raised is to what extent will domestic political restraint be able to contain pressures towards protectionist policies?

Why protectionism?

Protectionism discriminates against foreign goods and services in favour of domestic goods and services. Basic instruments used by governments to protect their economies include among others, tariffs and quotas, industry subsidies, currency manipulation, and import and export regulations.

In the wake of the global crisis, the argument for so-called “protectionism” (called “fair trade” by some) has gained voice based on the premise that keeping out foreign goods will save jobs, giving struggling domestic industries an opportunity to recover and prosper, and reduce the trade deficits. Politically, such quick fixes are popular and sound like the logical action to take during these times of severe economic distress.

However, the consequences are long term and usually negative. Beneficiaries of “protectionist” laws are special-interest groups, such as some big multinationals, unions, and farmers’ groups. These special interest groups usually have the money and political clout for influencing politicians to pass laws favourable to them at the expense of the uninformed consumers (voters) who bear the negative effects albeit the ones used to rally support for these laws.

Historically, protectionist measures have led to trade wars and ultimately worsened and prolonged the economic crisis. On the other hand, evidence in support of free trade, makes a compelling case for domestic political restraint against protectionism in support of free trade policies.

According to estimates by the World Trade Organisation (WTO), tariff and subsidy cuts for trade in goods tabled in the Doha Round were equivalent to a stimulus package of US$150 billion and that this amount could be more than doubled by other free trade initiatives under discussion. However, failure to complete the Doha Round could legally double global average tariffs, which would negatively impact international trade.

Protectionism on the rise

After the outbreak of the global crisis, a number of countries started implementing trade distorting measures as part of their response to the effects of the economic crisis. The major culprits were the G-20 member countries who are the major trading countries. India, the United States and China were amongst the perpetrators, despite the rhetoric call to desist from reverting to protectionist policies.

As the world economy began to recover in 2010, a joint summary by the WTO, OECD and UNCTAD on the G20 trade and investment measures, notes that while G20 governments have continued to resist protectionist pressures, new trade restricting or distorting measures continue to surface. Evenett (2010) notes that there is no evidence of a corresponding slowdown in protectionism and the G20 remain the main culprits.

This notion is supported based on the latest findings contained in the seventh WTO-OECD-UNCTAD report for the G-20 on trade and investment restrictions, which reveals that government-imposed trade and investment restrictions have not slowed and that the pace of removing such obstacles has decelerated. The accumulation of such restraints means that nearly 3% of global imports are affected while the restrictions now impact nearly 4% of G-20 trade.

Economic instability in the eurozone has not made the situation any better, but instead has contributed to countries becoming more cautious and we are seeing new protectionist measures surfacing. According to Evennet (2011), considerations by some G-20 governments to raise import barriers have been reported, or in some cases have already done so, to protect their domestic industries from what they may consider to be unfair competition.

Based on findings of the 10th Global Trade Alert report, new protectionist non-tariff barriers, discriminatory investment measures, export subsidies, and discriminatory bailouts together outnumber new trade-defence measures and tariff increases by a ratio of five to two (Evennet, 2011). According to the WTO (2012), in certain cases the barriers seem to take the form of procedural or administrative actions to slow down the clearing of goods at borders rather than new laws or regulations, thus raising the risks and costs of doing business. Furthermore, governments appear to prefer measures that are subject to fewer, looser, or no multilateral trade rules, thus exploiting the loopholes that exist and avoid challenges at the WTO.

Future outlook

According to the WTO, the recovery of the global economy remains weak and unemployment levels are high. World trade growth decelerated significantly last year, due mainly to the economic slowdown in major world economies. Merchandise trade volume grew by only 5.0% in 2011, a sharp fall from 13.8% in 2010. As the global economy continues to lose momentum, trade growth is projected to slow further to 3.7% in 2012, well below the long-term annual average of 5.4% for the last 20 years.

As the WTO DG Pascal Lamy noted recently in a speech to the Thai Chamber of Commerce in Bangkok on 30 May 2012, “Protectionism is like cholesterol: the slow accumulation of trade restrictive measures since 2008 – now covering almost 3% of world merchandise trade, and almost 4% of G20 trade – can lead to the clogging of trade flows.”

Indeed, the world cannot afford to revert back to protectionism. The ways in which industrialised countries and major emerging countries, such as China, deal with trade issues will play a key role in how quickly and how strongly the global economy recovers from the crisis. It is in the national interest of every country – and particularly developing countries – to avoid a descent into trade wars and to defend and extend the multilateral, rules-based trade system.

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